Turning 50 is set to become a milestone in pension planning as, following a recommendation from the regulator, providers begin to issue savers with their first retirement wake-up packs earlier than ever before. Here, we look at ten points that you need to think about.
The Financial Conduct Authority (FCA) wants retirement wake-up packs sent out earlier than before, from age 50, and then every five years to encourage earlier and more effective engagement.
The regulator made the recommendation as part of its Retirement Outcomes Review released yesterday.
At present, wake-up packs are sent out just four to six months before a scheduled retirement date that could have been set up to 40 years previously.
Here are the top ten pension planning tips which you should consider if you are celebrating the big ‘five-0′.
Top ten tips
- Work out what you’ve got
- Think about where you’ll want to live
- Think about when you’ll want to finish work
- Work out what you’ll need
- Pay more in
- Remember your family
- Stay on track
- Work out if you’ll want security, flexibility, or a bit of both
- Choose the right investments
- Don’t ignore your other finances
Most people start to plan at 60 which gives you time to make a difference and is likely to leave you working longer, or retiring with less money than you’d hoped.
“People have a crisis of confidence with their finances when they hit their 50s, as retirement and the seemingly scary decisions that need to be made appear on the horizon. This is despite their knowledge of financial matters actually improving.
“The way to tackle this is to start planning far earlier, building confidence for when you need to access your pension as you reduce your hours or stop work completely.”
1. Work out what you’ve got
People approaching 50 should start off by talking to their IFA about their current position and getting an up to date statement of what they have got. The IFA should work out which pensions are defined benefit (DB) and which are defined contribution (DC).
2. Think about where you’ll want to live
Some people may have plans to retire abroad, to move closer to the grandkids, or simply to live in a smaller home. It’s important to think about where you plan to live early on, as these decisions often take years of internal wrangling. Experience tells us that even if downsizing makes financial sense it is often not something people relish when the time comes.
3. Think about when you’ll want to finish work
Anyone aged 50 today will not receive their state pension until age 67. Many people will not have saved enough into their pension, meaning working until they’re older compared to today’s retirees (many of whom will have lucrative DB pensions).
Nearly a million people over-60 work part-time in the UK, so working fewer hours a week and gradually moving into retirement could be easier than you think. In recent years, the government has been striving to improve the work prospects for people over-50.
Employers can no longer force employees to retire just because they’ve reached a certain age and the government has also launched the Fuller Working Lives initiative, with the aim of increasing retention and recruitment of older workers.
4. Work out what you’ll need
The new state pension provides an annual income of £8,546 in 2018/19, but for most people this simply won’t be enough. Start by adding up all of the money you are spending now, remembering to include all the nice-to-haves like eating out and going on holiday as well as the household bills, mortgage repayments and cost of commuting to work.
The next job is to imagine what you will spend when you have stopped work, although this can be tricky. Think about if you will have repaid the mortgage, whether the kids will still be at home and if your transport costs will change when you are no longer heading to work every day.
5. Pay more in
When you’ve worked out what you’ve got and what you need, your details can be plugged into a pension calculator to see if you have a gap in your saving. Don’t be put off by the size of the hole! – It’s fairly common – and you still have time to change your financial future.
Even paying a small amount more into a pension can make a big difference, just adding an extra £80 per month from age 50 could give you around £25,000 more in your pension when you get to 67. Speak to your boss if you are employed, because many companies will increase how much they pay into your pension if you pay in more too.
6. Remember your family
If you are married, or share your finances with your partner, consider their pensions too. The household bills can be covered by both of you, so work out your joint retirement income.
Make sure you have let your pension schemes know who you would like to benefit in the event of your death. Modern day DC pensions will normally allow the full value of your savings to be paid to your heirs without tax if you die before age 75. The trustees have to take a judgement on who to pay your pension pot to, but it is better for you to let them know your intentions. DB pension schemes are a different kettle of fish. You will normally be entitled to a pension paid to your spouse or financial dependents, sometimes a pension for dependent children, and they may be entitled to a lump sum too but check the rules carefully to ensure you know how your own circumstances are catered for.
7. Stay on track
Your planning should start in earnest at age 50, if not before, but like a flourishing garden it will require regular attention. Checking your pension a couple of times a year is a good habit to get into from age 50. You can make this job easier by regular reviews with your IFA and you may also want to consolidate your pensions making them easier to keep track of. Make sure you are not giving up any valuable guarantees particularly on some older pension plans.
8. Work out if you’ll want security, flexibility, or a bit of both
Since April 2015 the rules about what you can do with your pension are far more flexible. You can still choose an annuity, which will provide a secure income for the rest of your life, but you can also keep your pension invested and draw an income from the investments, as well as encashing your pension entirely.
Using the pension pot to buy a secure income will be the right choice for lots of people, particularly if they will not sleep soundly with the knowledge that their income might fall or stop completely.
For those people who don’t require income certainty, the flexibility of keeping their money invested may be attractive. You can always do a bit of both, buying an annuity to cover the retirement essentials whilst using income drawdown for any nice-to-haves.
9. Choose the right investments
At this point, your focus may well shift from growing your pension as much as you can, to protecting what you have already built up. Remember that at 50 you could have another 15 or 20 years before you start drawing on your pension so plenty of time to invest and ride out any fluctuations in the stockmarket. This is particularly the case if you plan to keep your pension invested in retirement.
Someone with a £100,000 pension at age 50 could boost their overall pension by over £20,000 if they improve their investment returns by just 1% every year until they’re 67. Getting started is easier than you think. Your IFA has a greater understanding of investment principles than perhaps you do. They will have their list of the top investment funds available and provide tips on how to choose something that suits you
10. Don’t ignore your other finances
Just because retirement is looming into view, doesn’t mean that you should ignore your other financial goals. Paying off the mortgage, helping the kids with school or university fees or helping older relatives can all be important priorities so make sure you balance your goals.
Remember only two things in life are certain……………….Death and taxes!!!!
Talk to Broadleaf now.